Google’s been running a gauntlet of regulators in Europe and the United States at least since 2007. It has managed legal challenges to any number of corporate practices ranging from the way it protects user privacy to how it chooses mergers partners to how it protects copyrights. And perhaps the FTC probe may prove to be just another minor bump on the road to riches.

But there are reasons to believe that it will prove to be a big distraction. The investigation will apparently focus on the search-advertising business, which is Google’s bread and butter. And the specific concern – that the company is using its pre-eminence in searches to direct consumers to Google-related enterprises – could be problematic because it potentially threatens Google’s ability to exploit economies of scope and scale.

This doesn’t necessarily mean, of course, that the rest of us should identify with Google’s worries. But the parallels with the global assault on Microsoft’s dominance in PC operating systems and Internet browsing, which in the end served hardly anybody’s interest, are troubling.

For starters, serial run-ins with regulators have a way of changing New Economy corporate cultures, and not for the better. An army of lawyers and consultants, who are paid not to think outside the box, gain influence over strategic planning. Why risk the wrath of government in the next acquisition, or the next challenge to other established enterprises? And along with the lawyers come the lobbyists, who in the process of speaking money to power further pollute American politics and policymaking.     

This might all be worth it (from the public’s perspective), if one could count on antitrust policy to put the interests of consumers first. But antitrust is built on models of slow-changing markets in which the name of the game is to prevent sellers from charging more than costs. By contrast, high technology in general and information technology in particular is all about charging more than costs – that is, earning amazing returns on amazing innovations. And market concentration says more about who’s king of the hill now than who has the power to stop others from becoming king of the hill tomorrow.

Microsoft, you may recall, was pilloried for its “impregnable” advantage in Internet browser software thanks to the dominance of its Windows operating system. But somebody forgot to tell hundreds of millions of PC users, who turned to Firefox, Safari and Chrome when Microsoft became complacent – or too distracted by regulation to defend its turf with improved versions of Internet Explorer. Today, IE is down to 55 percent of the market – and its share is still falling in spite positive reviews for the latest version.

Ah, but Google really does have a hammerlock on web searching, you say.  Look again. In the past year, Google has lost 10 percentage points of the market, ironically, almost all of it to Microsoft’s Bing. Moreover, the mojo that made Google seem invincible seems to be wearing off. Yes, the Android operating system has made a giant splash in mobile devices, but not at the expense of Apple’s iPhone. Yes, Google’s efforts to move computing and information storage to The Cloud may yet pay off. But any number of competitors in the cloud, including Amazon, Netflix and Apple, are doing just fine.

Antitrust isn’t an idea whose time has come and gone. But it has entered a phase in which the old ways apply awkwardly, at best, to new industries. And the consequences of missteps – especially for economies like ours, whose only shield against senescence is innovation – are growing. Does it make sense to take Google down a peg? We’ll probably only find out when it no longer matters.

For all the hoopla, the cloud is a work in progress, with different companies offering variations in what they store, and how easy it is to access and share content. Cloud storage has been around for a while, in the form of online backup services like Carbonite and Dropbox. What’s new – and what’s changing the game – is the entry of major integrated IT/entertainment vendors including Microsoft, Google, Amazon, Facebook and now Apple.

So, what’s not to like? Once again, money is the root of all evil.

We kid, of course: Somebody has to cover the costs of all those petabytes of secure storage capacity in servers around the globe – not to mention all the computer power to manage the data efficiently. But the way the providers plan/hope to make money will certainly affect what economists think should matter most: the value to consumers.

All the new high-profile cloud storage services want to sell you something – or perhaps many things. Google is selling storage capacity beyond a free taste; Amazon offers a lot of free space, provided you buy some music; Microsoft is selling business software and entertainment hardware (Xboxes) to complement its storage.

Which brings us to the subject of Apple and the concept of the “walled garden”—the technology-driven barriers to moving off the platform. Apple wants you to play and work in its cloud using only hardware sold by Apple and (in a concession to commercial reality) PCs as long as they have Apple’s iTunes on board to sell entertainment. Oh, and did we mention, that Apple will allow only apps approved by Apple?

Walled gardens can have several advantages. They can improve user security and lower the costs of getting information, and they encourage firms to innovate by allowing them to keep more of the profits from innovation. Note, however, that walled gardens have downsides. In particular, they can affect the ease with which other companies can entice people – and, in the case of the cloud, people’s data — to move outside of the garden.

It’s tempting to give government a role in deciding what’s kosher within the garden and what’s not. We think the burden of proof should certainly be on those who want to regulate them. But there are gray areas – for example, when the garden owner attempts to foreclose options for competitors. Think of Apple not permitting apps on the iPhone that compete with Apple services, or a cable company barring access to specific VoIP services on the Internet. The test, in the end, ought to be whether the consumer benefits of a walled garden exceed the consumer costs.  

If, for example, an Internet Service Provider keeps suspect web sites off the platform to enhance security or the general user experience, this may not be a bad thing. The same is true of applications on the iPhone. In this case, competition from other phone providers should keep the company honest.

Should we stop worrying and learn to love yet another neat (and ultimately, expensive) innovation from Apple? Yes, as long technological change and ferocious competition offer alternatives to Steve Jobs’ sometimes-smothering embrace.

(This post was also published on Forbes.com)

Clever, but a tad shaky. Google operates in a “two-sided” market in which both advertisers and users of Google services are needed to make money. Without eyeballs on Google pages, the space is worthless to advertisers. But without advertising, Google couldn’t afford to give away services ranging from Google search to gmail to Google Docs.  

Google, moreover, is in no position to take its rank-and-file users for granted. While the Don’t-Be-Evil company still garners the majority of Internet searches, Microsoft’s Bing (and its ally, Yahoo!) have picked up about 30 percent of all search traffic in the United States. And there’s no reason to believe Google’s dominance would survive a serious decline in consumer goodwill, since the quality of the Bing search engine is plenty good enough – and sometimes better — than Brand G.

So, while it’s true Apple’s special place in supercool-gadget-loving hearts gives it very good reasons not to alienate the public, Google’s behaviour is also constrained by the market. We’re not claiming that either company’s incentives to balance gross commerce against high minded principle are perfectly disciplined by Adam Smith’s invisible hand. But neither are the incentives of those who would regulate them. For now, anyway, we think it makes the most sense to insist that all Internet companies make their privacy policies very clear, and let consumers decide what they think of them.

Start at the back end. President Obama hosted a town hall meeting on Facebook today because there is probably no more effective way to attract (positive) attention from under-forty-somethings. No suprises there. What may give you a slight jolt is how little attention Facebook has been paying to the nice folks who make and enforce the laws about privacy and competition on the Internet.

Facebook, it seems, has come very late to the lobbying party, spending just $351,000 last year on the arts of political persuasion – one-fifteenth as much as Google. Indeed, they seem to have been following the path once trod by Microsoft, which largely ignored the machinations of politicians in distant capitals.

But we all know what happened to Microsoft, which went from market Goliath in just about everything techie before the antitrust prosecutions in Washington and Brussels to Google wannabe thereafter. And Facebook has apparently learned from recent history: Along with beefing up its DC operations, it is hiring a gaggle of Washington insiders to woo the powerful.

It would be nice to believe that Facebook could get along fine by pleasing consumers and just minding its legal P’s and Q’s. But that’s not how it works in Washington anymore. Maybe it never really did – GE, after all, managed to get FDR to bless the cartelization of all of American big business during the Depression. (Don’t believe us? Just Google/Bing the National Recovery Administration.) But our own sense is that money talks on a scale never before seen in the nation’s capital.

Call us old-fashioned. It seems a pity, though, that the returns to investments in the political market are often higher than the returns to making better stuff and selling it for less.

(This post was also published on Forbes.com.)

Some four decades ago, Nobel economist George Akerlof argued that markets didn’t get it right when sellers knew a lot more than their potential customers. In the used car market, for example, buyers can’t readily distinguish lemons from non-lemons without investing in the services of an independent mechanic. So they are forced to assume the worst. Bad cars, in effect, drive the good ones from the market, leaving both buyers and sellers worse off.

To many economists, this problem of “asymmetric” information constituted a solid justification for regulating car sales. State legislators agreed, passing a spate of laws that guaranteed buyers the right to return lemons. But this consumer protection was hardly free: it added to the cost of transactions in the used car market.

What nobody noticed at the time, though, was that one man’s market failure was another’s market opportunity. CarMax pioneered the used-car guarantee, which finessed the information problem. And many other used car dealers followed suit.

These dealers have a strong incentive to discover faults and repair them before they put them up for sale. Of course, guaranteed cars sell for higher prices. But that’s just the point: the market found a way to separate the good cars from the bad ones.

Why are we telling you this? Because, given a little time, markets have a way of fixing themselves in more situations than you might imagine.

Consider the latest example. Everybody (well, lots of people, anyway) worries that companies are misusing sensitive customer information collected on the Internet. And in response, at least two states (Nevada and Minnesota) have passed laws that specify what can and can’t be done with such data.

But this is a subtler issue than it first appears. In some cases, buyers as well as sellers benefit from the information collection. If, for example, you search online for compact hybrid cars, Google can use the info to offer you a deal on a Prius and spare you any advertising for Escalades. Some people really, really don’t want to reveal what brand of vodka they prefer, or whether they vacation at the beach; others are indifferent.

Should government get in the middle? Not if markets can do it better. And that, apparently, is what’s happening. To induce you to use the latest versions of their web browsers, both Microsoft and Mozilla (the open-source software parent of Firefox) are including “do-not-track” options that will make it far harder to glean information from surfing behavior.

Wait, it gets better: the market is creating ways for those who don’t much care about privacy to make a buck by revealing all. And at least two companies, Personal and Allow are going into the business of acting as agents for individuals, selling their personal information (whether they use electric razor or blades, whether they’re planning beach vacation in the next six months, etc.) to advertisers for a commission.

We don’t have a clue where this privacy-for-profit stuff is heading. What we do know is that the market seems to be well on its way to solving a problem that would otherwise be an obvious candidate for a regulatory solution.

Don’t get us wrong: Sometimes the best fix for what ails is, indeed, government intervention. But it’s always worth asking whether markets can be mobilized to achieve the same end without help from big brother.

(This post was also published on Forbes.com.)

We wouldn’t know how to call balls and strikes here. Google probably does have market power in online searching and thus any discrimination against competitors would be problematic. But there are issues of motive in dispute: Google argues that it must continually adjust its search algorithms to prevent others from using dirty tricks to manipulate their placement on the rankings pages.

Moreover, even if Google proves to be the one wearing the black hat in this drama, it’s unclear whether government intervention is merited. Market power in the 24/7 world of information technology has generally proved to be fleeting. And, as US v. Microsoft illustrated, remedies against anti-competitive behaviour all too often come long after the king of the hill has been put on the defensive.

But that’s not what is bugging us. It’s the fact that EU probe isn’t stopping the attorney-general of the State of Texas from opening his own parallel investigation of discrimination by Google.

Google, of course, operates in a global market. And, in the absence of international coordination of antitrust policies, the company’s behavior ought to be fair game for national competition authorities. But does it really make sense to allow attorneys-general in Austin or Des Moines or Helena to pile on?

The hitch here, apart from the potential waste of resources in multiple investigations, is that the incentives of the state AGs are not well aligned with the broader public interest. Many of them use their offices as stepping stones to higher ones – think Eliot Spitzer and Richard Blumenthal – and are thus inclined to go after high-profile antitrust investigations even when the feds are on top of the issue. In the Microsoft case, grandstanding by state AGs in pursuit of headlines back home complicated its settlement by the Justice Department. (Disclosure: both of us have consulted for Microsoft.)

Moreover, there’s a problem here even when the state AGs have nothing in mind but the well-being of their constituents. State A may be happy to ignore the costs of an action borne by the citizens of state B (perhaps the state where the company at risk has a factory). Indeed, an AG may feel obliged to put his state’s interest ahead of the national interest.

We don’t deny there are times the state AGs’ authority to poke around in national (or global) matters does more good than harm. Eliot Spitzer, after all, played a very positive role in policing Wall Street in an era in which the SEC had neither the resources nor the inclination to do the job properly. But we think it does make sense to draw some rough-and-ready jurisdictional lines, creating the presumption that national regulators should take the lead in markets that are truly national (or international). In regional markets (funeral parlors, for example) the presumption should fall the other way.

Let’s let Brussels or Washington figure out if Google has done wrong. We’re pretty sure that the Texas AG has better fish to fry close to home.

End of story? Hardly. Microsoft’s unwitting collaboration with Putin Inc. illustrates a far broader phenomenon in the Third World (as well as in many advanced economies) whose political leadership is more inclined to take its inspiration from Robert Mugabe than from John Locke.

According to the Business Software Alliance, piracy is rampant in Russia, with roughly two-thirds of all programs used illegally (compared to one-fifth in the United States). Presumably the government could do a much better job of suppressing illicit software distribution. But consider the advantages of letting piracy flourish. First, it gives the government the now-infamous discretion to nail enemies at will by charging them with piracy. Second, it generates income for organized crime, which can be persuaded to share the loot with ethically challenged bureaucrats and to aid in the defense of the regime against rivals. Arguably most important, it makes everybody a felon (well, tens of millions of Russians, anyway), giving them a reason to tread warily in criticizing elected officials and opening up opportunities for extortion, small and large.

The make-everybody-a-crook strategy for maintaining power long pre-dates the current Russian oligarchy. Consider, for example, the reality that many governments collect only a tiny fraction of the income- and business-taxes on the books. Indeed, many Third World businesses couldn’t stay afloat if they paid what they nominally owed. By the same token lots of governments pay civil servants far less than subsistence wages, then look the other way when they sell public services ranging from electricity to education to health care.

Perhaps the most pernicious variation on this strategy is the one described by Hernando de Soto, the Peruvian development economist. In most poor countries, he argues, the vast majority of businesses must operate outside the law (in what’s now labeled the “informal economy”) because they cannot afford the time and money to comply with onerous government regulation or to establish formal property rights in places where such rights are typically documented poorly. This surely works to the financial advantage of the enforcers, from the food market inspectors to the cops on the beat. But de Soto argues that it is a key roadblock to economic development.

Illegal businesses can’t borrow money (except from loan sharks or family members) to expand. They can’t raise equity by selling stock. They have a terrible time enforcing contracts with suppliers and customers. And in the end, they are at the mercy of law enforcers who can always put them out of business in order to bolster the fortunes of favored competitors.

History is probably on the side of economies that are serious about property rights and the rule of law. But history isn’t always in a hurry – especially when it suits those in charge to slow it down.

(This post was also published on The Huffington Post.)

Now it appears to be Google’s turn in regulators’ klieg lights. Google, you probably don’t remember, epitomized the New Age company, adopting “Do No Evil” as its mantra and plunging into visionary enterprises including the preservation of every book ever published in digital form. But Google’s current dominance of some information technology niches (and the undisguised ambition to its reach) has made the company a prime target for antitrust authorities around the world.

Google managed to convince U.S. trustbusters to bless its purchases of DoubleClick (digital marketing technology) and AdMob (mobile advertising) – though it was apparently a close call. And the company still faces complaints about its dominance of web-based advertising in Europe, whose competition authority way too casually equates market share to monopoly.

Antitrust scrutiny is often called for, particularly when large firms acquire others in related fields. But scrutiny for the right reasons. Regulators need to recognize that in markets driven by rapidly changing technology and huge economies of scale, it’s natural for one firm or another to be king of the hill – albeit temporarily. So market share alone is no indicator of anticompetitive behavior or of the difficulty a newcomer with a better idea would have in competing for the business.

This tendency toward winner-take-all market outcomes explains why Google is following the explosive growth of Facebook with interest — and, we suspect apprehension. The number of Facebook users exceeds half a billion, and Google has already fallen flat with an attempt to use its highly successful web-based e-mail technology to counter the juggernaut.

So will Facebook, with its massive lead in social networking, bury Google? Probably not. After all, successful competition in a variety of market niches left Microsoft standing (and profitable). But, if Google fails to slow Facebook’s relentless growth in social networking, the search behemoth might find itself struggling in a lot of arenas it now dominates – notably online advertising.

Neither Google nor Facebook will last forever (or even necessarily a long time). Very little related to the Internet manages to survive the Next Big Thing – even companies whose names become verbs. Whether the winners du jour make it or not, though, what ought to matter from the competition regulators’ perspective is whether their behavior is aimed at preserving market power and stifling innovation. The short but eventful history of digital technology suggests that consumers will be better off if these behemoths are given the benefit of a doubt.

That’s not all bad. Most people welcome (within reason) ads for stuff they really want, and the primary goal of the Web trackers is to figure out what that might be. If you’ve been comparing hotels in Paris, you’d probably like to know that Air France is running a sale on business class seats. By the same token, if you’re a 30-year-old male, you’d probably prefer just not to hear about the latest developments in tampons. On the other side of the ledger, though, there’s plenty of information that everybody wants to keep private – for example, the medications they buy.

There are ways to address this problem (see paper by Hahn and Layne-Farrar [Download Here]), though none seems completely satisfactory. One is to set up a formal “opt-in” procedure that requires snoopers to get permission before they snoop. Ideally, this would involve a standard-form agreement that spelled out the sorts of information that were off-limits.

But make no mistake: There would be a price to regulation. First, it might not work well – when was the last time you read the contract that pops up whenever you download software? Second, whatever rules were adopted, there would surely be ambiguities that kept an army of lawyers well fed. Third, the biggest potential abusers of consumer privacy could evade the regulations by moving offshore. And last but not least, in the process of policing the snoopers, the regulators would become snoopers themselves.

One potential alternative: Use the threat of government regulation as an incentive for self-regulation. Our guess is that Google, Yahoo!, Microsoft, et al. could do a better job at setting industry standards both consumers and advertisers could live with. Anyway, it would be worth a shot.

Some consumers have long complained about Apple’s practice of locking iPhones so that they could only work on AT&T’s network, and Apple’s practice of deciding what applications could and could not be installed on the phone. They argue that the arrangement minimizes competition and limits their choices. But, as Bob Hahn and Hal Singer documented in a study published last fall [Download Here], the exclusivity agreement has likely spurred others to accelerate their own innovations and provided consumers with a wide range of smartphone alternatives, some of which are arguably superior to the iPhone.

If we’ve learned anything from the technology marketplace of recent years–change happens overnight and apparent dominance ends fast. Or, perhaps you’ve forgotten that AOL once seemed to have an iron grip on Internet access, Microsoft was the favorite target of antitrust zealots, Google was once just a mathematical expression, and Apple was a struggling afterthought in a computer market dominated by the Wintel partnership.

As Hahn and Singer wrote in September 2009: “Although casual observers have often claimed that a particular innovation was here to stay, they commonly are proven wrong by unforeseen developments in this fast-changing marketplace. We argue that exclusive agreements can play an important role in helping to ensure that another must-have device will soon come along that will supplant the iPhone, and generate large benefits for consumers.”

And, from personal experience in the U.K. where the iPhone is sold by multiple carriers, we can tell you that having a choice in carriers does not deliver iPhone nirvana. There is something of an iPhone price war that makes the phone more affordable, but the user experience once you own the phone is not all that rosy. Reception is quite spotty in the countryside when traveling on trains, and dropped calls from London to Manchester are the rule rather than the exception. And that’s with a provider that’s reputed to have a very good network.

Still, our personal experience is not the key issue. What counts for decision makers is the relative benefits and costs of exclusive agreements. The primary benefits of banning an exclusive iPhone-type agreement would be greater price and non-price competition in the mobile device market. But competition in this market is already intense. From BlackBerry to Droid, new smartphones are coming out all the time. Even Google has produced its own branded phone. Are consumers better off with identical iPhones from every carrier or from a wide variety of smartphone models competing to distinguish themselves with an expanding array of capabilities, applications and designs?

Barring exclusive agreements carries significant costs. Carriers would have weaker incentives to aggressively promote new devices and ensure network quality. They would also have fewer incentives to innovate, such as developing new and better networks, like the “4G” networks that are coming online now to handle exploding data demands by consumers and businesses.

The real question for policymakers and the courts is the underlying structure of the market and whether a dominant player forecloses competitive choice or new entrants. In the smart phone market, it is hardly the case that the iPhone is dominant. Apple is a major player, but Research in Motion (BlackBerry) and Nokia outsell it. A long view of this market shows that competitors have risen and fallen over time–exactly what one would expect in a market that is changing rapidly. And the available choices are enough to make your head spin.

The mobile device marketplace in the U.S. is remarkably robust. That dynamism makes it easy for regulators to pick the right economic policy: namely, a light-touch regulatory approach that allows device makers and networks to innovate. Consumers will be better off if the courts appreciate the fundamental economics of the market and follow regulators’ lead. If they want continued innovation and expanding choices, this class action against Apple and AT&T is one that consumers should pray that they lose.

(This blog post was published earlier on Forbes.com.)